April 2018, Volume 24, Number 2

Trade Wars?

The world's economy expanded by three percent in 2017, and is projected to expand by almost four percent in 2018. Before the 2008-09 financial crisis, the world's economy had been expanding by four percent a year. The three major issues retarding growth are poor infrastructure, increased inequality, and slow wage growth.

President Trump imposed tariffs of up to $60 billion on Chinese-made goods in March 2018, asserting that China is an "economic enemy" that "steals" US intellectual property. China immediately retaliated with tariffs of $3 billion on US nuts, wine, and pork. The US has a $400 billion trade deficit with China.

Many US economists agree that China is aiming to achieve dominance in many industries that require extensive R&D, have increasing returns to scale, and where network effects mean that the more users of a product, the more valuable it becomes. China aims to kick-start such industries by requiring foreign firms to transfer their technology to China in order to sell their products in China, allowing Chinese competitors to "steal" R&D and bolster competing Chinese firms.

The World Trade Organization was established in 1995 and admitted China in 2001. The US was the leader in lowering trade barriers after WWII to promote economic integration and growth, but under President Trump the US has become more skeptical of the ability of the WTO to promote "fair and balanced" trade.

The 164 WTO member countries traded goods worth $16 trillion in 2017 and exported services worth $5 trillion. Trade normally increases faster than economic growth: when the world grows by one percent, trade often expands by 1.3 percent.

The WTO in 2001 launched the Doha Development Round of negotiations to further reduce barriers to trade, including in agriculture and intellectual property. Doha failed amid disputes between industrial and developing countries.

China and the US are clashing at the WTO over whether China should be considered a "market economy," which would make it harder for the US and other countries to block Chinese imports. The Chinese government is insisting on the market economy status it was promised 15 years after joining the WTO, or December 12, 2016. The US and the EU are resisting, citing the many ways that the production of goods in China can be subsidized.

More WTO member countries are using the WTO to complain about the trade practices of other members. China is a party to a quarter of all WTO complaints, and successfully challenged US efforts to restrict imports of Chinese goods made by state-owned enterprises. Critics say that the WTO panels that decide trade complaints tend to favor exporters over importers.

In 1960, 24 percent of US?workers were employed in manufacturing; in 2018, eight percent were employed in manufacturing. The Industrial Revolution that began in Britain in the 1760s replaced hands with machines, and brought previous farm workers into factories. Early factories employed children and other workers for long hours under less than ideal conditions, but they also helped to raise wages and improve life expectancy.

China's entry into the World Trade Organization in 2001 led to the disappearance of millions of manufacturing jobs in Europe and the US, often in communities that were dependent on one to two factories, providing few comparable local job options for displaced workers. Artificial intelligence or AI is the next major threat to jobs, and could displace millions of truck drivers, customer service representatives, and assembly jobs within a decade. Meanwhile, many Chinese coastal cities soon boasted some of the world's largest factories.

President Trump in March 2018 imposed 25 percent tariffs on imported steel and 10 percent on imported aluminum, citing national security concerns that could result from the US becoming dependent on imports of steel and aluminum. Canada and Mexico were exempted, and Trump said that other nations, including the EU, Korea, and Brazil, would not be subject to the tariffs if their exports to the US did not threaten national security.

China produces half of the world's steel and aluminum, some of which is exported to Korea and Japan, further processed, and then re-exported. Much of China's steel and aluminum is produced by state-owned firms that critics say are subsidized.

The Trump tariffs attracted commentary on the declining willingness of Western nations to cooperate and maintain the liberal world order committed to lowering trade barriers. Many European countries are grappling with globalist versus nationalist forces. The US appears to be leading the nationalist camp, which often features large numbers of people who distrust the institutions created to foster globalism.

Critics of nationalism say that globalism is the correct policy, but that freer trade must be accompanied by policies to help those hurt by freer trade and to redistribute some of the gains of freer trade from the rich to the poor.

Lawyers for the Alliance for Competitive Steel and Aluminum Trade, which oppose the tariffs, are examining successful suits that challenged Trump's so-called Muslim travel ban to oppose the tariffs. They may go to the US Court of International Trade and argue that Trump's national security justification is false because the Pentagon opposed the tariffs on steel and aluminum. China and the EU may challenge the tariffs at the WTO.

The Trans-Pacific Partnership free-trade agreement between 11 countries was signed in March 2018; President Trump withdrew the US from the TPP in 2017.

The World Bank in 2017 made $61 billion in loans and investments in developing countries. Private investors, by contrast, sent over $1 trillion to developing countries.

Wealth. The Bloomberg Billionaires Index estimated that Jeff Bezos was worth $100 billion at the end of 2017, followed by Bill Gates with $91 billion and Warren Buffet with $85 billion. The next richest people were Spain's Amancio Ortega with $76 billion; Mark Zuckerberg with $73 billion; France's Bernard Arnault with $63 billion; and Mexico's Carlos Slim with $62 billion.